Advisors, Not Their Clients, Should Lead on ESG Investing

How popular is ESG-themed investing? It’s estimated that over $20 trillion is invested in assets because of their favored for their environmental, social and/or governance (ESG) characteristics, including over $8 trillion in the U.S.

Here’s another indicator of the growing interest in ESG investment: This year’s Sustainable Investing Conference sponsored by Gitterman Wealth Management had 570 attendees — double the number of last year’s and four times the number for the first conference in 2016 — and that excludes the more than 200 who were turned away due to capacity issues.

Despite the interest, few advisors are actually investing in these assets, said Jeffrey Gitterman, co-founder of his namesake firm and conference host.

He, along with many other presenters at the conference, emphasized that the responsibility for investing in sustainable assets rests with financial advisors, rather than their clients.

“It’s my job to tell clients where to invest their money, to release the demand for these assets,” said Gitterman. “ESG is the GPS of investing, the live data about the trip we’re taking today. ESG helps avoid the road closures, the traffic and socially responsible investing is the wrap product for the GPS.”

Ron Cordes, founder of the Cordes Foundation, which invests exclusively in assets to have a social impact, echoed the sentiment: “How many clients ask for ETFs, SMAs, etc?” We don’t wait for them to ask.” (Cordes funded his foundation initially with proceeds from the sale of investment firm AssetMark, which he co-founded.)

There are many reasons for advisors to invest client funds in sustainable assets and to use ESG factors when choosing among assets, according to multiple presenters at the conference:

These strategies can help attract and retain clients, especially women and millennials where demand is reportedly the greatest. “70% of women and 60% of children fire the family’s wealth advisor” following the death of the family patriarch, said Fran Seegull, executive director of the U.S. Impact Investing Alliance. The lack of ESG-related investments is one of the driving forces for that that, said Seegull, who said impact investing represents a “golden opportunity for wealth advisors.”

Sustainable assets are a way to align investments with a client’s values to customize them. They allow investors “to define the important characteristics of their portfolios,” said Brace Young, partner at Arabesque, an asset manager that invests in companies with high ratings according to the firm’s proprietary ESG metrics.

“It’s no longer sufficient to have competitive returns but whole host of other attributes,” said Ingid Dyott, senior portfolio manager at Neuberger Berman.

Sustainable assets can lead to better long-term performance with less volatility and “have the potential to “generate alpha with less risk,” said Joe Sinha, chief marketing officer of Parnassus Investments, which invests solely in assets that meet its ESG criteria. Those companies that tend to perform best on sustainability issues tend outperform their peers, according to Carol Laible, CEO of Domini Impact Investments, referencing research by George Serafeim at Harvard Business School.

They can accomplish with private capital what governments can’t or won’t do. “Sustainable investing can’t be done by government alone,” said Courtenay Rattray, Jamaican ambassador to the UN. “We need $90 trillion invested by 2030 on global infrastructure but investment now is only $6 trillion per year.”

Sustainable assets can also be used as a lever to impact corporate policy via proxy votes. But don’t assume that asset managers who publicly speak out on social issues such as BlackRock on guns or State Street on climate change are using their leverage to impact corporate policy. According to the latest Asset Manager Climate Change Scorecard released by the 50/50 Climate Project, BlackRock and State supported only 23% and 38% of climate-related shareholder resolutions, respectively, and most of the 13 asset managers rated excluding Pimco, UK-based Legal & General and Natixis always or often supported shareholder proposals on disclosure of political influence.

The Sustainable Investing conference took place at the UN, where countries adopted the 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals three years ago, and emphasized that ESG is not an asset class but a strategy. Advisors can use the strategy to screen companies based on environmental, social and governance issues across all asset classes and entire portfolios, or for parts thereof.

Seventy-five percent of companies now report ESG, according to Laible at Domini Impact Investments, which invests exclusively in companies according to its ESG standards. Advisors therefore have the option to choose stocks based on companies’ potential contribution to a “just and sustainable economic system.”

The data, however, differs because there are no standards for these metrics and there are multiple analytics companies providing their own ESG ratings. That’s no reason for advisors to avoid ESG strategies, according to conference panelists.

“You don’t have to wait for better data,” said Karina Funk, head of sustainable investing at Brown Advisory.

For the S (social) piece of ESG, for example, you can get data on a company’s employee turnover, diversity and gender pay equity, its ability to attract and retain talent and info on wages for workers, said Dyott of Neuberger Berman. “These and other issues are very relevant to examining to sustainability of company’s business model.”

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